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Sweden’s success is not a result of its extensive welfare state, as many argue, but of its positive cultural norms and its recent free market reforms, author Nima Sanandaji concludes in a new report.

An over-bearing welfare state, along with high taxes, damaged the economy in Sweden as well as undermining its social capital, the report states.

British Conservative PM Elizabeth Truss commented the report:

“This paper busts many myths about Sweden. Many people in Britain who cite the Swedish model seem unaware with the growing problems of high taxation and welfare dependency and the consequent reforms that are now taking place.

“On schools policy, taxation, abolition of national wage bargaining and personal retirement accounts Sweden is leading the way. This has resulted in a private sector led economic revival. The Swedish experience shows us the way forward in many policy areas; to be successful in the modern age, economic freedom is a necessity.”

The report suggests that it is only through focusing on increasing economic freedom and introducing more choice in public services that it has rebuilt its economy. Specifically, by reducing taxes and benefits it has increased work incentives and by introducing more choice, for example through voucher schemes, they increased productivity in areas like education, pensions, healthcare and elderly care.

As late as 1950, Swedish tax revenues were still only around 21 per cent of GDP. The policy shift towards a big state and higher taxes occurred mainly during the next thirty years, as taxes increased by almost one per cent of GDP annually.

The rapid growth of the state in the late 1960s and 1970s led to a large decline in Sweden’s relative economic performance. In 1975, Sweden was the 4th richest industrialised country in terms of GDP per head. By 1993, it had fallen to 14th.

Big government had a devastating impact on entrepreneurship. After 1970, the establishment of new firms dropped significantly. Among the 100 firms with the highest revenues in Sweden in 2004, only two were entrepreneurial Swedish firms founded after 1970, compared with 21 founded before 1913.

As Swedes became accustomed to a system of high taxes and generous government benefits, their positive social norms gradually declined. In the World Value Survey of 1981-84, almost 82 per cent of Swedes agreed with the statement ‘claiming government benefits to which you are not entitled is never justifiable.’ At that time, Sweden was still a nation with very strong morals related to public benefits but as the population adjusted its norms to the higher tax and welfare regime, the number who held this view dropped steadily in further surveys. In the survey of 1999-2004, only 55 per cent of Swedish respondents believed that it was never right to claim benefits to which they were not entitled (Heinemann, 2007).

The favourable social outcomes in Swedish society were evident before the creation of an extensive welfare state. The expansion of welfare benefits, however, created huge social problems. Generous benefits, in conjunction with high taxes and a rigid labour market led to high levels of dependency amongst large segments of the population and have limited the ability of Swedish society to integrate migrants into the labour market.

The full report, The surprising ingredients of Swedish success – free markets and social cohesion, by Nima Sanandaji, can be downloaded from www.iea.org.uk.